The Swiss Franc Exchange Rate and Deviations from Uncovered Interest Parity: Global vs Domestic Factors

Simple asset pricing implies that differences in currency risk premia (aka persistent deviations from uncovered interest parity) across countries reflect differential exposures of these countries’ exchange rates to global shocks. We explore the implications of this logic for the Swiss franc and for Swiss monetary policy. The Swiss franc exchange rate is a ‘small’ safe-haven currency and therefore particularly prone to global shocks. While the franc’s role as a safe haven has fluctuated over time and across currency pairs, the importance of global shocks for the franc’s exchange rate imposes additional constraints on Swiss monetary policy.